Question

A company currently has $600 million of assets financed with $280 million of debt, and Net...

A company currently has $600 million of assets financed with $280 million of debt, and Net income last year was $22 million. Calculate the company's return on assets ratio and debt/equity ratio under the following assumptions or changes:

1. No changes in above.

2. Assuming the company had leased $30 million of its assets "off the balance sheet."

3. Assuming the company had leased $70 million of its assets "off the balance sheet."

4. Assuming the company had leased $95 million of its assets "off the balance sheet."

Based on a review of your calculations for the financial ratios above, explain why a firm might want to engage in "off balance sheet" financing.

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Answer #1

1. Return on assets= 22/600*100= 3.66℅

Debt /equity = 280/(600-280) = 0.875

2. Off balance sheet financing increases the liabilities of lessor:

ROA = 22/280+320+30= 3.5℅

Debt/equity = 310/320= 0.968

3. ROA = 22/670*100= 3.28℅

Debt /equity = 350/320= 1.094

4. ROA = 22/695*100= 3.166℅

Debt/equity = 375/320 = 1.172

The off balance sheet financing is not recorded in the balance sheet the above ratios are calculated after proper treatment of off balance sheet financing as per GAAP.

The companies want to engage in off balance sheet financing, as this is not reported in the balance sheet and they can window dress their performance by improving certain ratios.

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